America gets a phone call from the bank

Not so great, to tell you the truth. You know you're running an absolutely enormous overdraft? I need you to close it.

Malka, what is this? What's new? I always have a huge overdraft. You know I always repay in the end.

The thing is, you don't. I checked and for the last 10 years the overdraft has done nothing but grow every month.

What do you care if I let it grow? You know I'm good for it. Business is terrific, my earning power keeps rising... The thing is, it isn't. I checked and in the last year your situation has been deteriorating.

C'mon, it's a passing thing. You saw how I leaped beyond the obstacles in the road over the last decade. Just give me a little more time.

Truth be told, we're out of patience. We want you to close your overdraft.

Thanks, but we have enough of your securities. I don't even know how much they're worth any more. If you don't mind, we want cash.

Okay, so give me another week.

And how will that work out?

The Chinese - they're supposed to lend me money next week.

Why should they? Don't they know how much you owe us, and every other bank in town too?

They know, but it pays for them. I use the money they lend me to buy goods from them.

I don't think that arrangement with the Chinese can last forever.

Well, if they balk, I can go to those emirs in the Gulf.

Let me guess. You use the money you borrow from them to buy their oil.

Yeah, something like that.

At what price? I hear that oil's been climbing lately.

Yes, but that doesn't matter because I've been paying them in dollars, which I print right here in my basement, and the more dollars I print, the less they're worth. So the real price of oil hasn't actually risen much. It just seems to have risen.

You probably mean to foist those dollars off on me too.

Naw, the kids cleaned me out. But I have securities backed by dollars that come due in twenty, thirty years.

The central branch told us not to accept long-term securities. Just cash.

OK, I'll print some more tonight and drop by tomorrow.

If you don't mind, we'd prefer euros or yen.

W W W

That phone call between Malka from the bank and America may be a fiction, but the facts are stark. For years America, its citizens and financial institutions have been borrowing more and more but now the bank has called, and called in its loans.

The first to get a ring were the "Ninjas" - "No Income, No Job or Assets." Or, subprime borrowers, who never should have received mortgages in the first place, but because a whole slew of financial institutions could cut a fast cash coupon if they arranged it, arrange it they did, and in spiraling numbers.

The angry calls from the bank triggered a chain reaction. The financial institutions that had lent the money in turn received calls to return the money they'd borrowed in order to finance the mortgages; hedge funds that had invested in the loans got calls and were forced to throw out the mortgage-backed securities; and then the U.S. government started getting calls from investors who had bought the dollars - by buying bonds - it had printed in recent years.

Most of these players who got calls simply rushed to borrow elsewhere. Some, like the big banks which raised emergency cash injections from the Gulf and Far East, had to pay through the nose for the pleasure.

And then, two weeks ago, as the nervousness in the market peaked, the phones started to ring at Bear Stearns. Banks, hedge funds, insurance companies and the other institutions that had worked with the investment house politely told the Bear Stearns management that if it wouldn't be too inconvenient, they'd like to get their money back because they'd decided to work with somebody else.

Of all the investment banks on Wall Street, Bear particularly loved two things: the mortgages market, and large leverage. The Bear people developed a huge weakness for mortgages and by borrowing enormously to lend onward, they managed to rack up hefty profits. That was their competitive edge against the other four big investment banks.

Nine months ago, two mortgages-based hedge funds that Bear Stearns ran collapsed, but it was only in recent weeks that Bear Stearns' clients and creditors began to realize that the implosion of the mortgages market could ruin a substantial chunk of the business model on which Bear had based its profits in recent years.

The first calls that the Bear Stearns management received were from journalists, who'd heard that clients were pulling out. The management denied the rumors contemptuously: it was an 85-year old institution with equity in the billions, known for its excellent risk-evaluation departments.

Eleven days ago, on Thursday afternoon, as the calls from major clients continued to arrive, the Bear Stearns CEO realized that at any moment, he'd run out of money.

The next day, at five in the morning, a historic conference call was made. On the line were U.S. Fed chairman Ben Bernanke, the New York Fed chairman Timothy Geithner, Treasury Secretary Henry Paulson, and his deputy, the Under Secretary for Domestic Finance, Robert Steel. After two hours the foursome decided they had no choice but to bail out the Bear. Paulson, reports the Wall Street Journal, called U.S. President George Bush to report their decision.

The Fed infused the cash through JPMorgan, but the identity of the conduit doesn't matter. What matters is that the Fed's decision to prevent the collapse of an investment bank is a sharp deviation from the central bank's most central tenets, and perhaps those of American governance in general.

The rules of the free market would have failing businesses fall, be sold off or merged, because if the government steps in, then companies, institutions and managers will behave irresponsibly, confident that the government will come to the rescue. The free market teaches that bad businesses should be allowed to die, making room for the good ones. If there's no accountability, the economy isn't competitive.

But the belief that Bernanke, Paulson and many in the U.S. economic cabinet have in the markets' ability to solve their problems alone has been eroding fast. Large swathes of the American financial establishment look rather like one great big "bad business" right now.

Bear's rescue isn't surprising. The Fed has been aggressively intervening in the markets in ways that would have been unthinkable six months ago. For instance it announced that it was willing to buy hundreds of millions of dollars' worth of mortgage-backed securities even though nobody knows how much these securities are worth any more, and how many will ultimately be repaid.

The speed at which the economic leaders decided to junk their own rules of economics and rescue Bear Stearns shows how keenly they fear a chain reaction if the bank were to collapse. The extreme step demonstrates the extreme situation of the American financial establishment, the terrific difficulty that the players are having in evaluating the risks in the various financial instruments in which trillions have been invested in recent years, and it attests to the players' loss of faith in the system.

Not only might the rules of the game on Wall Street and the financial markets have to be rewritten. So might the recent history of the U.S. and global economy. In the last decade, the U.S. economy managed, again and again, to stand strong against all shocks. But now the whole world is asking what will solve the American crisis, what can stop the mounting pain. And we say with sorrow, that the only solution to the pain - is the pain itself. A year or two of pain, that the Americans and their economy had managed to evade for many long years.